Buying Opportunities Amid Muni Selloff

By Teresa Rivas

Post-holiday, it’s back to business as usual, namely, fiscal cliff worries: Muni bonds have been much in the news lately for their selloff, as investors have been yanking their money out, partially in fear of higher tax rates.

So is it time for bargain hunters to be on the prowl?

Yes, to an extent, MarketWatch’sOliver Purschewrites. Pursche prefers individual bonds over fixed-income ETFs. He notes that those investing in funds are always exposed to the risk of capital loss as managers rotate in and out of particular products, and investors have less control because—unlike with individual bonds—they cannot choose a maturity date, and thus don’t have an exact time frame to recoup their money.

So which individual bonds should investors buy? Pursche says relatively high yield short term (one- to five-year), and intermediate (three- to 10-year) munis look best in the current environment, as they will likely be a favorite of wealthy investors and have not run up as much as corporate bonds.

This comes after advice earlier this week from Invesco, which wrote that tight supply bodes well for muni bonds in 2013. Also Monday, BMO Capital Marketsnoted that despite the near-term tax threat, “because of the recent sell-off, the long-term likely impact is only about 10-20 basis points versus fair market levels.”

The widely watched iShares S&P National AMT-Free Municipal Bond Fund (MUB), which has slid in recent trading days, was roughly flat this afternoon.

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